Discusses Chapter 11 bankruptcy issues and issues with business reorganization.

Friday, August 7, 2015

Surrendering Property in Bankruptcy

One of the most common issues a bankruptcy debtor must
decide early on in their case is whether or not to try and keep a piece of
property or to surrender that property back to the creditor in satisfaction of
the debt.There can be a myriad of
reasons why a debtor chooses to surrender a piece of property in their
bankruptcy case but a recent opinion by Judge Williamson in the Middle District
of Florida makes the surrender decision even more important.That is because in In re Metzler Judge Williamson held that when a debtor surrenders a
piece of property during bankruptcy they are barred from taking any actions to
defend or stop the foreclosure proceeding in the state court. In re Metzler, 530 B.R. 894, 900 (Bankr.
M.D. Fla. 2015).

This is a
very important development in the Middle District of Florida.Now, when a debtor is considering the
surrender of real property they must be committed to their ultimate decision
because there is no going back.Under Metzler, debtors in the Middle District
of Florida cannot take any “overt actions”, i.e. defending a foreclosure case,
that would prevent the secured creditor from foreclosing on the property and
transferring title.

The Metzler
opinion actually involved two bankruptcy cases, one a Chapter 7 and the other a
Chapter 13.A Chapter 7 debtor has three
options regarding their secured property: redeem the property, reaffirm the
debt the property secures, or surrender the property.Under Bankruptcy Code § 521 all Chapter 7 debtors are required to file a
statement of intent within 30 days of filing the case which tells the court
which option the debtor has chosen.Chapter 13 debtors are not required to file a statement of intent but
instead are required to file a plan of reorganization which indicates how the
debtor proposes to treat the secured property.Bankruptcy Code §
1325 gives the Chapter 13 debtors three options for treating the secured debt:
gain the secured creditor’s consent to the plan, cram down the plan treatment
over the secured creditor’s objection, or surrender the property.

Both
debtors in Metzler took explicit acts
to prevent the respective secured creditors from foreclosing their mortgages by
actively defending the foreclosure cases after stating their intent to
surrender the properties during bankruptcy.Metzler argued that surrender in bankruptcy actually just dissolved the
automatic stay but did not have any effect on her state law rights.But the court held differently when it stated
that “Surrender means something.In the
context of Bankruptcy Code §§
521 and 1325, the Court concludes the term means that a bankruptcy debtor must
relinquish secured property and make it available to the secured creditor by
refraining from taking any overt act that impedes a secured creditor’s ability
to foreclose its interest in the secured property.” In re Metzler, 530 B.R. 894, 900 (Bankr. M.D. Fla. 2015).In light of this decision, all potential
Chapter 7 and Chapter 13 debtors need to be 100% positive regarding their
decision to surrender a piece of property before informing the court of their
intent.All prospective debtors should create
a plan of intent for each secured debt and corresponding asset with their
bankruptcy counsel before filing their case.